Margining: When the Item Being Purchased is Known

Introduction:

Whenever we consider retail or tourist purchases of goods from local stores, we need to ensure that the dollar amount we enter into the Model is appropriately Margined. Margining is a process of splitting the cost per item on the customer's receipt into the four (4) primary components that make up purchaser costs: the cost you and I pay for an item when we go to the store. The four elements of the cost are:

Retail Margin: The operational cost of the retail store. This is the portion of the cost that the retailer keeps to operate their store, pay their workers, pay taxes, and hopefully make profit.

Wholesale Margin: This is the portion of the total cost the wholesaler keeps for their operational expenses.

Transportation Margins: The value charged by various forms of transport to move products from their production site to a distributor and from the distributor/wholesaler to the retailer.

Cost of Production: The value of the product when it leaves the 'factory' floor.

Detailed Information:

When we know exactly what our tourist or householder is purchasing, we have the advantage of being able to see all four (4) elements of the Margin. To do this though, we have to start with the product being purchased, rather than the retailer who sells the product. For this example we will look at a $1MM purchase of gasoline in the IMPLAN 2007 Model.

The Sector for gasoline production is 115 Petroleum Refineries. So in the Event we will select Sector 115.

Before entering any other value, ensure that the Event Year is properly set to the year of the value of sales.

Next we will enter our $1MM into the Industry Sales field.

Since the $1MM is actually the value of retail sales of gasoline and not gasoline production, we will need to apply Margins. To do this in the Event window, go go to Event Options> Edit Event Properties>Margins> Yes.

The Event will not appear to change; however, if we navigate to the Margin> Edit screen (Event Options> Edit Event Properties>Margins> Edit), we will see that the value is split across several Sectors including several types of transport, 326 Retail Gas Stations, and 319 Wholesalers.

However, note that the Local Purchase Percentage for all Sectors is 100%. This implies that the whole of the Retail sale, wholesaler sale, transport sale, and production occurred inside the Study Area. Since we do not know this to be true, which is typically the case in such studies, we need to make an adjustment to the Event values to reflect that only the Retail Sales are 100% local. To do this, we will need to close the Margin> Edit screen.

Note that the value of the LPP field drops considerably. This value reflects the LPP for petroleum only.Before Margins are Applied:

After Margins are Applied:

To see the remainder of the Local Purchase Percentage values and to ensure that all our retail sales are local (assuming that this known), we will want to reopen the Event Options> Edit Event Properties>Margins> Edit screen. Note that the Local Purchase Percentages (% Local column) have all changed based on the local availability of each commodity. 326 Retail Gas Stations is probably less than 100%.9a. To edit this up to 100%, click into the LPP field for Sector 326 and type in 1.0.

Close the screen. Your Event is now Margined and is ready to be analyzed.

Usage:

Margins are applied to all retail sales. This article is specific to sales where the item purchased is known.

Margins are not applied to purchases of services, such as haircuts, car insurance, restaurants, or movie theaters. This is because services are producing a new good rather than just selling an off-the-shelf product. A restaurant produces hamburgers from raw materials such as meat, lettuce, and tomatoes, much like a window factory produces windows from glass, nails, and wood.

The proper application of Margins allows for splitting of the Value-Chain to show the impacts to all related local Sectors. This keeps us from over impacting the production Sector or over-impacting the retail Sector.

In addition, applying Margins to a producing Sector allows the Model to be much more specific about its Margins.

Thus if we Margin $1MM of sales in Sector 326 in a 2007 IMPLAN Model, we would see that the retail portion of the sales was only 16.4% or $164K. This is the amount of sales of all products, from windshield wiper fluid to gasoline and beer to lottery tickets, that the gas station keeps for its operations.

When we are able to specify what was purchased, in our example gasoline, then we can specifically see the portion of gasoline sales the retailer keeps. In this case it is 21.4%.

Commodity Activity Type

The same process as described above applies to setting up the Margining of Commodity Activity purchases. However, Margining commodity purchases does differ from Margining Industry purchases in regards to the way that purchases are split in the Model.

When a commodity purchase is Margined, it will get split by market share.

Market shares will split the production portion of the impact across all Industries and Institutions within the Study Area Data that can produce the Event commodities.

Thus significantly more Sectors will be impacted in many commodity based Events

The market share mix over which the production portion of the sale will be split can be viewed at Explore> Social Accounts> Balance Sheet (Tab), and select View By: Commodity Balance Sheet and the Industry-Institutional Demand tab.

In addition, market shares include Institutional production of commodities for the region. Institutional production is leaked from the Model and thus generates no Indirect or Induced Effects.

Inventory sales are leaked because they represent production attributed to another year's economic activity, and thus will have no impact in the current year's purchasing and labor requirements.

Government production is leaked because there is no direct correspondence between the funds a government receives and its spending. Likewise, money from the sales of government production could potentially be spent in a broad variety of programs or pursuits that may or may not be executed in the Study Area region.